Spanish Small & Midcaps: Unicaja

Unicaja an investment opportunityUnicaja Banco's HQ at Malaga (Spain)

Bankinter | Unicaja Banco (UC from now on) offers a good investment opportunity which we consider is interesting from a price angle. UC is trading at a discount close to 50% – in terms of Price/Tangible Book Value – with respect to the main domestic banks (Caixabank, Bankia and Sabadell). Its ROTE of around 5% is lower than its peers (7%) but the discount demanded by the market seems excessive in our view. The capital ratio CET-1 “fully-loaded” estimated for 2017 is 13.5% and the coverage of unproductive assets is higher than the sector average.

We forecast a significant increase in profits in the period 2017/2020 thanks to the improved fundamentals of the business (risk, solvency and the outlook for interest rates), as well as savings in wholesale financing costs (70 M€/year gross). We are starting coverage of the stock with a Buy Recommendation and a Target Price of 1,55 €/share. This is 10.7% higher than the upper price range set for its stock market debut (1,10/1,40 €/share).

We believe UC has the capacity for suprising on the upside in terms of capital generation and dividend yield. According to our estimates, UC would obtain a capital ratio CET-1 “fully-loaded” of 14% in 2020 (vs a target of a little over 12%) and could increase its dividend pay-out to 50/55% (vs a target of 40%). If our estimates are correct, the dividend yield would reach 7.5% in 2020 (vs 3.2% estimated for 2017). A brief description of the company: UC is the product of the tie-up between Unicaja (Caja de Ronda, Cadiz, Almeria, Malaga and Antequera) and España-Duero (Caja España, Salamanca and Soria). It is the eighth biggest bank in Spain in terms of volume of assets, has a high liquidity ratio (loans/deposits above 83%) and a 10% share of the lending market in Andalucia and 13% in Castilla and Leon. (It sells traditional products and has a stable client base).

Stock market listing: After the Public Share Subscription offer for 40% of UC’s capital, which took place on 30 June, the share price has increased by 5.9% (vs a 1.2% rise for the Ibex-35) and the underwriting banks exercised the green-shoe option for the maximum amount of 10% ahead of time. The funds raised from the transaction (€765 million) allow UC to strengthen its balance sheet and pay off €604 million of CoCos before the due date.

Our view: UC is an interesting investment opportunity based on: (i) UC trades at discount close to 50% – in terms of Price/Tangible Book Value – with respect to the main domestic banks, against a backdrop of improving business fundamentals; (ii) credit quality indices are performing satisfactorily and coverage of unproductive assets (55%) is higher than the sector average (around 50%); (iii) the bank’s strategic plan for 2017/2020 is reasonable and we believe UC has the capacity to suprise on the upside in terms of capital generation and dividend yield. Our estimates are in line with the bank’s main targets for 2020 (ROTE of 8%), bad loans (4%) and coverage rate (over 62%). But we think the capital ratio CET-I “fully-loaded” could reach 14% in 2020 (vs a target of 12%). If our forecasts are right, UC could increase its dividend payout from the 40% estimated for 2020 to over 50%.